How food marketers resort to cost cutting to cover fast-rising cost

Rajat K. Baisya

With rising inflation, cost of products increases but marketer cannot pass on the same to consumers fearing drop in sales. Marketers, therefore, resort to cost cutting to cover fast-rising costs.

With rising inflation, cost of products increases but marketer cannot pass on the same to consumers fearing drop in sales. When the cost increases, profits will be under squeeze and companies will have to struggle to deliver the shareholders’ expectation. Marketers, therefore, resort to cost cutting to cover fast-rising costs. Products are still priced the same as firms fight to cover incremental cost. Major food marketers are quietly altering their recipes on candy, dairy products, and chocolates by adding fillers and substituting costly ingredients by relatively cheaper ingredients to cut costs.

Hershey has substituted vegetable oil for the costly cocoa butter used in some of its chocolates without sacrificing the taste. Organizations are working closely with the ingredients manufacturers and suppliers for reformulation of products and recipes in many cases. The leading spice makers McCormick & Co is now supplying food companies with cheaper spices and new flavor blends. In some cases the source of ingredients are also changed. For example, Mexican oregano instead of costlier Mediterranean oregano and garlic concentrate instead of costlier and also heavier to ship garlic cloves are being used.

Some companies even are resorting to rationalize the product lines. General Mills reduced the number of shapes of pastas to half and thus trimmed manufacturing costs by 10%. The meat substitute like soybean protein, which is used as filler in many meat preparations, is now being used in larger quantities. In the recent years the consumption of soy-protein has gone up by 10% as food ingredient. Some players even go to the extent of reducing the pack size and contents. Mars Inc maker of M&M candies is resorting to cut the size of its Funsize candy pack.

Food Manufacturers face not only the rising shipping cost due to increase in fuel price but also significant increase in the cost of sugar, wheat and other basic food ingredients. This price pressure is not going to disappear soon which is also arising out of growing demand of meat and dairy products as living standards rise. Food manufacturers are making those changes in recipes without perceptible difference in taste as well as without sacrificing the quality and nutritional standards. General Mills has recently substituted pecans with less expensive walnuts in its Pillsbury Turtle cookies and found out that consumers liked walnuts as much as the costlier pecans.

The change of recipe has to be undertaken after carrying out extensive consumer research to ensure that the new revised recipe is equally acceptable to the same set of target consumers who buy the products now. It is essential that consumers are not able to detect the changes made. This means that changes made should not be perceptible. Otherwise, it might impact sales. For example, Campbell Soup Co has reduced the amount of meat in its chicken noodle soup. Consumers noticed that and sales suffered. After this episode the new CEO made a promise not to cut corner again. Food marketers try to ensure that the most important aspect of the product is that the taste is not changed. If however, the product recipe is tinkered with too frequently, slowly over a period of time the taste might change which could be dangerous to the business. The restaurants and food service companies are resorting to cheaper cut of meats in their menu.

McDonald is testing less expensive methods of making double cheeseburger. Already some restaurants are selling the burger with one slice of cheese instead of two. Burger King is testing a smaller size hamburger as it is trying to overcome the increasing ingredient costs.

Food marketers often change recipes to introduce new health claims like adding fibre or whole grains in the recipe or even low salt and polyunsaturated fats in the formulation. These are done to make additional health related claims and may not be triggered by cost consideration. Studies have indicated that cocoa butter can reduce inflammation and lower blood pressure. So while substituting cocoa butter may not be harmful but it lowers the over all health benefits. These aspects have to be considered while resorting to recipe change.

Ketchup giant H.J.Heinz has been breeding sweeter variety of tomatoes in an effort to reduce the amount of high cost corn syrup used in the ketchup production. Heinz is also cutting back on packaging cost. Starches and hydrocolloids can substitute very costly ingredients like milk fat solids in the ice cream, processed cheese, yoghurt, sour cream and dairy based drinks preparations.

The companies are also looking for cost cutting possibilities in the areas of transportation. Wherever possible rail transport is being used instead of road transport.

In the health food segments manufacturers are resorting to use bye products like rice bran which is a bye product from milling industry or even wheat bran in the formulation. Rice bran and wheat bran were earlier sold as animal feed. Gradually these are shifting to find use as health food ingredient. NutraCea Inc sells stabilized rice bran to bread and cereal makers as a meat enhancer. Company says its rice bran is healthy meat enhancer because it is fat free, contains protein and can replace other meat fillers such as starch and mustard flour.

When businesses go thorough difficult phases innovation can only save them. Cost cutting is a continuous and enterprise-wise effort to exploit avenues of cost reduction in all functions and business processes. In this exercise R&D department also plays an important role. As purchased items which go as input to food production constitute largest part of the cost of the finished product and therefore the recipe modifications and or changes offer greatest possibility of cost reduction. However, this is a very difficult task and organizations have to do it with utmost care so that consumers don't feel cheated or let down by its changes. Food ingredients manufacturers play a very vital role in this process. Food ingredients business is thus very fast growing industry in India.

 

-- This article was first published in "Processed Food Industry" monthly magazine.

 

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